Navigating China’s tax system can be challenging, especially for businesses and individuals new to its regulations.
Two of the most important taxes affecting transactions in China are Value-Added Tax (VAT) and Consumption Tax.
This guide explains how these taxes work, who they apply to, and how to manage compliance, with practical examples, tables, and authoritative resources.
What is VAT in China?
VAT is a tax levied on the value added at each stage of production and distribution.
It applies to the sale of goods, provision of services, and importation of goods into China.
Businesses pay VAT on their purchases (input VAT) and collect VAT on their sales (output VAT).
The difference is remitted to the tax authorities.
VAT Rates in China (as of 2024):
| Category | VAT Rate |
|---|---|
| Standard goods and services | 13% |
| Transportation, construction | 9% |
| Financial, consulting, cultural | 6% |
| Exports | 0% |
Source: State Taxation Administration of China
Small-Scale vs. General Taxpayers:
- General taxpayers can deduct input VAT and must comply with stricter invoicing and reporting requirements.
- Small-scale taxpayers pay a lower flat rate (currently 3%) but cannot deduct input VAT.
Example:
A company buys raw materials for RMB 100,000 (VAT: RMB 13,000) and sells finished goods for RMB 200,000 (VAT: RMB 26,000). The company pays the difference (RMB 13,000) to the tax bureau.
What is Consumption Tax in China?
Consumption Tax is levied on specific goods considered luxury or harmful, such as tobacco, alcohol, high-end cosmetics, and luxury cars.
It is usually paid by manufacturers or importers and passed on to consumers.
Consumption Tax Rates (Selected Categories):
| Product Category | Tax Rate Range |
|---|---|
| Tobacco | 36%–56% |
| Alcohol | 20%–40% |
| Luxury Cars | 10%–40% |
| Cosmetics | 15%–30% |
Source: PwC China Tax Guide
Example:
A manufacturer produces a luxury car with a factory price of RMB 500,000. If the applicable consumption tax rate is 20%, the tax is RMB 100,000, increasing the final retail price.
Key Differences Between VAT and Consumption Tax
| Feature | VAT | Consumption Tax |
|---|---|---|
| Scope | Most goods and services | Specific luxury/harmful goods |
| Taxpayer | Sellers of goods/services | Manufacturers/importers |
| Deductibility | Input VAT deductible for general taxpayers | No deductions allowed |
| Purpose | General revenue collection | Regulate consumption, target luxuries |
| Refunds | Possible for exporters | Not applicable |
Compliance and Practical Considerations
- VAT Registration:
All businesses must register for VAT with local tax authorities and obtain a taxpayer identification number.
How to Register for VAT in China (Deloitte) - Fapiao (VAT Invoice):
Businesses must issue and retain official VAT invoices (fapiao) for all transactions. Electronic fapiao are increasingly common. - Record-Keeping:
Maintain detailed records of all input and output VAT, as well as consumption tax payments, for at least five years. - Policy Updates:
China’s tax policies change frequently. Monitor updates via the State Taxation Administration or consult a professional advisor. - Professional Advice:
Tax compliance in China is complex. Consider working with a reputable firm such as PwC China or KPMG China.
